Why News Feed ads are driving an ad pricing increase at Facebook

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Ad pricing increase driven by New Feed ads at Facebook

In the previous part of this series, we discussed mobile becoming the main revenue growth driver for Facebook (FB). According to Facebook, News Feed ads are driving the ad pricing increase, especially on mobile devices.

During the conference call to announce 2Q14 earnings, Facebook’s management revealed that the average price per ad increased 123% compared to last year. This increase was primarily driven by a higher mix shift towards News Feed ads.

News Feed ads have significantly higher engagement, click-through rates, and price per ad compared to right-hand column ads. So a higher proportion of ads appearing in News Feed drives up the overall average price per ad.

Ad U.S. Display Revenue Growth Rate

Facebook’s ad revenue growth rate is expected to be behind only Twitter in 2014

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According to a report from eMarketer and as the chart above shows, Twitter (TWTR) could lead U.S. digital display ad revenue growth rates for 2014 with an expected 79% growth. Facebook could grow its ad revenues at a rate of 47%. Surprisingly, Amazon’s (AMZN) ad revenue growth rate is expected to be higher than Google’s (GOOGL). LinkedIn (LNKD) and AOL are some other players that are expected to show healthy ad revenue growth rates this year.

Although Facebook’s revenue from the U.S. grew 59% in the first six months of 2014 compared to the first six months of 2013, according to company filings, eMarketer must be expecting Facebook’s revenue growth rate to slow down in the U.S. in the next six months for the overall growth rate to become 47%.

Facebook introduced News Feed ads in Q1 last year. And since News Feed ads are driving growth at Facebook, the company believes its year-over-year comparisons will become more challenging moving forward. This is why Facebook believes that its ad revenue growth will slow down. So eMarketer’s hypothesis seems to be correct in estimating Facebook’s ad revenue growth rate in the U.S. market this year.

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